If you’re a small business owner who is confused about the taxes for small companies, you’ve come to the right place. Even Albert Einstein once said that the hardest thing to understand in the world is income tax. Today we are going to have a look at some small business tax shelter strategies and ideas to help you out this tax season.
Small Business Tax Shelter Tips and Tricks
1. Watch the Adjusted Gross Income
If you didn’t know already, lots of tax limitations, breaks, and additional taxes relate to the adjusted gross income (AGI), or the modified AGI. For instance, you can avoid the health care taxes on the earned income for one salary (or from self-employment) if your AGI doesn’t exceed $200,000 if you’re single. For a joint return with your spouse, the limit is $250,000.
2. Set Your Payroll Amount
One mistake many people do is to wait until the fourth quarter to complete their payroll. However, this isn’t such a good idea, and for the IRS this can be a red flag for an audit. If you have already completed your quarterly payroll throughout the year, it’s time to update it. Maybe you need to increase or lower it, depending on your net income. In this way, you can keep better track of what taxes you can avoid.
3. Contribute to a Retirement Plan
If you have a profitable business, even if it’s a small one, you can shelter some income in a qualified retirement plan. This will offer you a tax deduction for the contributions you make and it offers you the possibility of deferring tax on earnings on contributions since the tax is paid only when you start taking money from the plan. Moreover, if you have employees, this is a great way of gaining employee loyalty if you offer them this retirement savings opportunity.
4. Put the Kids on the Payroll
It might seem like a crazy small business tax shelter strategy, but it’s very useful. You can pay your children for bona fide service provided in your business and thus evade some taxes. According to the law, if you pay your children through a single member LLC or a sole-proprietorship, with the child being less than 18 years of age, the company doesn’t need to withhold payroll or FICA taxes. The other benefit is that the child can use the standard deduction specified in the law against any income you might pay since the sum counts as earned income and thus it doesn’t entail any income taxes. However, for an S- or C-corporation, according to the Internal Revenue Code, you will need to withhold FICA from all the employees found on the payroll.
5. Adopt an Accountable Plan
In case you have employees and they get a reimbursement for using their vehicles on company business, you can adopt an accountable plan. This will help you save them income taxes, as well as save your company some payroll ones. This arrangement allows you to reimburse your employees for their business expenses without considering the reimbursements as income they receive. As such, you don’t need to include them in the W-2 form and they’ll not be taxed on them. This translates to your company saving FICA and unemployment taxes on the amounts.
6. Don’t Forget about Carryovers
There are certain deductions and credits that have limitations, which can prevent you from fully using them during the current year. However, they allow for a carryover to the following years. It’s useful to keep track of these carryovers, so you won’t forget to use them in the future. Luckily, you can do this with most tax preparation programs or the tax professionals that help you. In this category you can include:
- Home office deduction;
- Capital losses;
- Net operating losses;
- General business credits;
- Charitable contribution deductions, etc.
7. Establish Your Entity Now
The beginning of January is the perfect moment to set up a bank account, as well as your books. Various states impose fees and franchise taxes that makes it logical and economical to file articles around the beginning of the year. However, make sure you don’t file it too early, which might cause you a short-year tax return.
8. Close on the Rental Property
Cost segregation is an area that is rapidly growing and has been used only by those who own large commercial projects. It refers to reclassifying the assets of a rental property and turn them into a real and personal property. In this way, you move some assets into a class that is quickly depreciating. As a property owner, you can defer thousands of tax dollars. You may also be able to deduct some other passive income from here, but be careful! It is possible you end up with a carry-forward write-off if you don’t pay attention.
9. Buy a Vehicle
Another good small business tax shelter strategy is to invest in a vehicle. If you run a business that could use a large SUV or a truck, you should consider purchasing a vehicle that weighs more than 6,000 pounds. The deduction for depreciation, in this case, can reach thousands of dollar, depending on how much the vehicle costs and the business-use percentage. It’s a good idea to talk this through with your tax advisor.
10. Change the Business Structure
Finally, a great small business tax shelter idea is to change your business structure. For instance, an LLC can choose to pay the taxes as an S corporation. Thus, the only salary paid to the LLC owner will be subjected to FICA taxes. If there is no election made, the LLC owner will need to pay the self-employment tax on the net earnings of the business.
Here you have a brief clip dealing with the effect of taxes on small business:
Luckily, there are plenty of small business tax shelter strategies and ideas if you want to save some money. Some of them are very creative, which is why many people overlook them, but this is even more of a reason for you to adopt them. Check out the suggestion above and see if they fit your company or organization structure.
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